Channeling the great Aba Lerner: Simon Wren-Lewis: The Interest Rate Lower Bound Trap and the Ideas that Keep Us There: "Inflation... is the ultimate constraint on... fiscal stimulus.... If inflation is stuck below target and your measure of the output gap says that gap is zero, you should ignore the output gap measure and enact a fiscal stimulus. So why has this not happened in Japan, or the UK, or the Eurozone?... There are three candidates...

...The first is what I call the consensus assignment... that monetary policy, and only monetary policy, can be used to stabilise the economy to hit the inflation target. It was the macroeconomic policy consensus until the GFC.... The second candidate is... that too many governments have internalised the idea that deficit bias is bad and therefore it is good to run down debt. Of course that idea only makes sense when the consensus assignment is operating, and it does not apply when interest rates are stuck at their lower bound. When rates are stuck at around zero we need to reverse the assignment and use fiscal policy to stabilise the economy until rates are well clear of their floor....

The third and final reason is a phobia about government debt.... Perhaps public officials and some others are influenced by the economic case against high debt to GDP and fail to see that it does not apply when interest rates are at their lower bound. But I think there are two more important reason for deficit phobia. The first comes from watching countries get into serious difficulties, and often resorting to the IMF, because they could no longer finance their debts. But this concern does not apply to a currency issuer whose debts are in their own currency.... The second reason for debt phobia is ideological. Debt phobia is a means of keeping a lid on the size of the state. We see this in its most blatant form in the US from the Republican Party, but I think it is powerful everywhere... ...


#noted

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